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At the N.Y. Fed: Press Briefing on Household Borrowing with Close-Up on Student Debt

An examination of recent developments in household borrowing was the focus of a press briefing held this morning at the New York Fed. President William Dudley offered opening remarks on the latest developments, then Bank economists briefed the press on their analysis of household indebtedness, placing a spotlight on student loans. Their research is based on the New York Fed Consumer Credit Panel—which is based on Equifax credit report data—as well as data from the National Student Clearinghouse. The presentation contained three components: (1) an analysis how aggregate household debt today differs from its 2008 peak, (2) new evidence on student debt growth, delinquency and repayment, and (3) an investigation of the relationship between homeownership, student debt, and educational attainment.

Shifts in Household Balances and Borrowers
Household debt reached a historic peak in the third quarter of 2008, at $12.7 trillion, followed by years of declining balances as Americans reduced their balances by consciously scaling back their borrowing and lenders charged off loans and tightened lending criteria. Over the past three and a half years total household indebtedness began to grow again, reaching $12.6 trillion in the fourth quarter of 2016. However, the American balance sheet looks quite different now than it did in 2008, with major shifts in the types of debts held as well as in the types of borrowers who hold the debt.

A key change is that borrowers have shifted away from housing-related debt (including first mortgage and home equity lines of credit) toward auto and student loan debt. Housing-related balances are still nearly $1 trillion below the peak reached in the third quarter of 2008, but this gap was nearly entirely offset by higher auto loan balances (+$367 billion) and student loans (+$671 billion).

In addition, there has been a shift in the characteristics of borrowers themselves, as debt balances have moved increasingly to the older and more creditworthy. Borrowers age sixty and older now hold 22.5 percent of the total outstanding balances, compared to 15.9 percent in 2008; meanwhile balances held by borrowers under age fifty have declined. Further, there has been substantial growth in the balances held by borrowers with credit scores over 760—which saw an $878 billion increase, while balances held by subprime borrowers have declined by $752 billion since 2008.

One interesting note is that although there have been shifts toward older and more creditworthy borrowers, shares of balances associated with borrowers from higher-income or lower-income areas have remained fairly stable; however, this stability masks underlying changes in the composition of debt, particularly in borrowing by those from lower-income areas. We see a shift toward auto and student loans and away from mortgages by those from lower-income areas, whereas mortgage balances of individuals from higher income areas have nearly caught up with the 2008 peak.

The overall improvement in credit quality has resulted in low and still-improving delinquency rates (with the exception of student loan delinquencies); further, new bankruptcies and foreclosure notations have the lowest levels recorded in our data.

Student Loan Update
Aggregate student loan balances have continued to increase and stood at about $1.3 trillion at the end of 2016, an increase of about 170 percent from 2006. Aggregate student debt is increasing because more students are taking out loans, the loans are for larger amounts, and the speed with which borrowers repay their debts has slowed down. New debt originations continue to increase: 2015 graduates with student loans left school with about $34,000, up from only $20,000 just ten years before.

While about 36 percent of student debt holders owed less than $10,000, and 65 percent owed less than $25,000, only about 5 percent of student debt holders owed more than $100,000 in debt in 2016. Yet these big-balance borrowers account for nearly 30 percent of the total balances outstanding, so their outcomes and repayment success have a disproportionate influence on the overall picture.

Student loan default and delinquency rates appear to have leveled off, albeit at a relatively high level. Defaults peaked in 2012, and have stabilized since 2013; the 2009-11 cohorts saw the highest default rates, with some improvement among more recent cohorts.

We have noted in the past that delinquency and default rates are lower among higher-balance borrowers; however, the default rates among higher-balance borrowers have worsened notably in recent years. Further, payment progress is slower among those who borrowed more. Ten years later, over 70 percent of the original balance has been repaid among those who had borrowed less than $5,000 when they left college in 2006, compared to a reduction of only 25 percent among students who borrowed more than $100,000.

Higher balances, increasing participation in student loan programs, and slower repayment are pushing up aggregate student loan balances. Although defaults are improving, the pay down progress of recent cohorts continues to decline.

Homeownership
The final portion of the press briefing was on educational attainment, student loans, and homeownership, using education records from the National Student Clearinghouse that were newly matched with credit records from the Consumer Credit Panel. These findings are presented in greater detail in a separate post. New analysis shows that college education is associated with markedly higher homeownership rates regardless of debt status, which increases at each additional level of college attainment. However, having student loans dampens homeownership rates at every level of education, and higher debt balances are associated with even lower homeownership rates.

Stay Tuned…
The slides from this press briefing are available here, but in the next few weeks we will feature a post on Liberty Street Economics that will review the material from the Student Loan Update section of this press briefing in greater detail.

Disclaimer
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Rajashri Chakrabarti is a senior economist in the Federal Reserve Bank of New York’s Research and Statistics Group.

Andrew Haughwout is a senior vice president in the Bank’s Research and Statistics Group.

Donghoon Lee is an officer in the Bank’s Research and Statistics Group.

Joelle Scally is the administrator of the Center for Microeconomic Data in the Bank’s Research and Statistics Group.

Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.

The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Donald Morgan, all economists in the Bank’s Research Group.

The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.

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